Using a large panel of income data from U.S. federal tax returns for
the period 1987-2009, the authors show that for men’s labor earnings, the
increase in inequality was entirely permanent (100 percent), while for total
household income, roughly three-quarters of the increase in inequality was
permanent. They estimate that the permanent variance for men’s earnings roughly
doubled in the 20 years between 1987 and 2009, while the permanent variance of
total household income increased by about 50 percent over the same period.

Looking at the impact of tax policy on inequality, the paper finds that
although the U.S. federal tax system is indeed progressive in that it has
provided some help in mitigating the increase in income inequality over the
sample period, it has, however, not significantly altered the broadly increasing
inequality trend. All told, the results suggest that rising income inequality
will likely lead to greater disparity in families’ well-being and reduce social
welfare in the long-run.

“The distinction between permanent and transitory inequality is important for
various reasons. First, it is useful in evaluating the proposed explanations for
the documented increase in annual cross-sectional inequality. For example, if
rising inequality reflects solely an increase in permanent inequality, then
consistent explanations would include, for example, skill-biased technical
change or long-lasting changes in firms’ compensation policies. By contrast, an
increase in transitory inequality could reflect increases in income mobility,
driven perhaps by greater flexibility among workers to switch jobs. Second, the
distinction is useful because it informs the welfare evaluation of
cross-sectional inequality increases. Specifically, lifetime income captures
long-term available resources, and hence an increase in permanent inequality
would reduce welfare according to most social welfare functions. By contrast,
increasing transitory inequality would have less of an effect on welfare,
especially in the absence of liquidity constraints restricting consumption
smoothing,” they write.

There's been a big debate/fight over whether the increase in inequality is
mostly due to technological change or to changes in the rules of the game (e.g.
institutional and political changes that helped the demise of unions). Above,
this is captured as "skill-biased technical change or long-lasting changes in
firms' compensation policies." I think both are at work, and that there are
interactions between the two explanations (technological change that allows production to be moved in fact or in threat to other countries, for
example, works against unions and changes the balance of political power, and that can lead to changes in the laws, rules, and regulations that unions need to be effective).

In any case, changing this long-run trend is one of the most important social issues that we
face.

Using a large panel of income data from U.S. federal tax returns for
the period 1987-2009, the authors show that for men’s labor earnings, the
increase in inequality was entirely permanent (100 percent), while for total
household income, roughly three-quarters of the increase in inequality was
permanent. They estimate that the permanent variance for men’s earnings roughly
doubled in the 20 years between 1987 and 2009, while the permanent variance of
total household income increased by about 50 percent over the same period.

Looking at the impact of tax policy on inequality, the paper finds that
although the U.S. federal tax system is indeed progressive in that it has
provided some help in mitigating the increase in income inequality over the
sample period, it has, however, not significantly altered the broadly increasing
inequality trend. All told, the results suggest that rising income inequality
will likely lead to greater disparity in families’ well-being and reduce social
welfare in the long-run.

“The distinction between permanent and transitory inequality is important for
various reasons. First, it is useful in evaluating the proposed explanations for
the documented increase in annual cross-sectional inequality. For example, if
rising inequality reflects solely an increase in permanent inequality, then
consistent explanations would include, for example, skill-biased technical
change or long-lasting changes in firms’ compensation policies. By contrast, an
increase in transitory inequality could reflect increases in income mobility,
driven perhaps by greater flexibility among workers to switch jobs. Second, the
distinction is useful because it informs the welfare evaluation of
cross-sectional inequality increases. Specifically, lifetime income captures
long-term available resources, and hence an increase in permanent inequality
would reduce welfare according to most social welfare functions. By contrast,
increasing transitory inequality would have less of an effect on welfare,
especially in the absence of liquidity constraints restricting consumption
smoothing,” they write.

There's been a big debate/fight over whether the increase in inequality is
mostly due to technological change or to changes in the rules of the game (e.g.
institutional and political changes that helped the demise of unions). Above,
this is captured as "skill-biased technical change or long-lasting changes in
firms' compensation policies." I think both are at work, and that there are
interactions between the two explanations (technological change that allows production to be moved in fact or in threat to other countries, for
example, works against unions and changes the balance of political power, and that can lead to changes in the laws, rules, and regulations that unions need to be effective).

In any case, changing this long-run trend is one of the most important social issues that we
face.